The One Phrase That Actually Matters In Yellen's Speech: "Nominal Interest Rates Cannot Go Much Below Zero"

While many are focusing on the latest attempt by Yellen to restore some Fed confidence, even if it means confusing the market even more and sound far more hawkish than last week's FOMC statement, which showed once and for all that the mandate of the Fed is the stock market and global risk pricing stability, and is written by Goldman Sachs, with an emphasis on the circular assumption that inflation is under control because, well, it is under control...

... which naturally is something to be expected from a speech titled "Inflation Dynamics", the one phrase in the quite massive speech of 5531 words, had nothing to do with inflation, and everything to do with the Fed's deflation "reaction function", i.e., NIRP.

This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:

...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.

So just a "little" then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%? Yellen explains:

... the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low.

Well, no: not less room - more room: negative room! What is the most negative inflation, pardon deflation, can get? Very:

This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.

Just in case it was lost, here it is again, from footnote 9:

Because of the inconvenience of storing and protecting very large quantities of currency, some firms are willing to pay a premium to hold short-term government securities or bank deposits instead. As a result, several foreign central banks have found it possible to push nominal short-term interest rates somewhat below zero

And there you have it: while Yellen is desperate to regain some of the Fed's lost credibility with the September rate indecision, what she is really doing is reciting Bernanke's Nov 2002 speech: "Deflation: Making Sure "It" Doesn't Happen Here." Only, the US already has deflation. Which is why it is better to call Yellen's version: "Depression: Making Sure "It" Doesn't Happen Here" and just like Bernanke's 2002 speech hinted at LSAP, aka QE, so Yellen's speech, academic in its discussion of theoretical inflation, is really a warning that the Fed is now actively considering negative rates as its primary "reaction function."

After all, it's not like Kocherlakota would come up with negative dots out of the blue.

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As for the big picture from Yellen's speech, Pedro said it best: